It hasn't been easy keeping up with all the recent developments related to Iran's nuclear program, which still looms as a large, unresolved risk embedded in the global price of oil--though you would never know it from the behavior of oil markets in the week since Iran's hidden nuclear enrichment site was revealed. It's not clear whether traders have concluded that the exposure of the Qom site strengthens the hand of the US, Britain, France and Germany sufficiently to make a diplomatic solution likelier--and conflict correspondingly less likely--or the impact of this story has been overwhelmed for the moment by weak market fundamentals. After all, this is merely the latest phase of a crisis that has been simmering for a number of years; a wait-and-see attitude looks prudent, particularly in light of the market's current capacity to adjust for the temporary loss of Iran's oil output, should that ensue. However, I believe that we are also approaching the point at which much of this uncertainty resolves, because fairly soon the US and its allies must choose either to act decisively to prevent Iran from acquiring nuclear arms, or relinquish those options and focus on containing the threat.
Our relative torpor on the subject of Iran's nuclear enrichment program and that country's ultimate nuclear ambitions has been jolted by a succession of events this month. First, President Obama announced his intention to abandon the development of land-based anti-ballistic-missile sites in Central Europe, the main purpose of which was to intercept Iranian ICBMs on their way to targets in Europe or the US, in favor of a sea-borne strategy focused on shorter-range missiles. Then came the announcement at the G-20 meeting in Pittsburgh that Iran was building a secret uranium enrichment site that could start operations as soon as next year, potentially capable of producing roughly one atomic bomb's worth of weapons-grade material a year. Neither the fact that the US and its allies have apparently known about the Qom site for several years nor the last-minute disclosure of the facility by Iran to the International Atomic Energy Agency seemed to dampen the shock effect of the announcement. After customarily glib excuses, the Iranian regime's next step was to test-fire short- and medium-range missiles. The US has demanded immediate inspections of the new facility, and the UN Security Council meets tomorrow to take up these matters.
So where does this leave us, other than with nerve-wracking reminders of the pre-war situation with Iraq? If we've been paying attention, the latest revelation shouldn't have come as much of a surprise. As I explained at length in 2005, the arguments that Iran's enrichment efforts were aimed at anything other than a nuclear weapons capability were always pretty weak. Stripping away the diplomatic language of the US and its allies and the lame obfuscations from Tehran, the uncovered Qom facility leaves scant room for doubt concerning the determination of the Iranian government to militarize its nuclear program. Whether or not it is also currently developing warheads that would use the uranium enriched at sites like the one at Qom, there is no other plausible reason for building a nuclear facility in secret under a military base. And common sense tells us that, as with mice, where there is one there are very likely others.
What I conclude from all this is that we are approaching a set of distinct decision points, after a long and intricate dance that probably served the interests of both parties. The passage of time has allowed Iran to make steady progress on enrichment and missile technology, but it has also opened up options for us. As I noted last fall, lower oil prices have created a window for a set of actions--truly crippling sanctions, a naval blockade, or air attack on the facilities in question--that would have been unthinkable when oil was marching steadily toward $100/bbl and beyond. That window will begin to close once the global economy resumes growing rapidly enough to erode the healthy cushion of spare global oil production capacity that now stands at 5.5 million barrels per day--a buffer that would also erode from the other direction if new oil projects fail to keep up with oil's intrinsic decline rates. In other words, if the situation isn't resolved one way or another within the next year or so, the strategy of containment of a nuclear-armed Iran in a new kind of Cold War could become the only viable option left to us.
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Wednesday, September 30, 2009
Monday, September 28, 2009
Wake-Up Call
In his column in Sunday's New York Times, Tom Friedman highlighted the growth of renewable energy in China and proposed that it represented "The New Sputnik"--referring to the wake-up call this country received when the Soviet Union orbited the world's first satellite in 1957. As is so often the case when Mr. Friedman turns his attention to energy, I find his argument here to be made up of equal parts important insight and facile over-simplification. There is no doubt in my mind that the nascent renewable energy industry represents a new cornerstone for the global economy in the 21st century, and a tremendous business opportunity in the bargain. It is also a key element of any practical strategy to address the causes of climate change. At the same time, however, we must remain clear-headed about its characteristics and limitations, if we are to avoid falling into industrial-policy traps of the kind illustrated in last Friday's posting on solar power in Germany, or the creation of a green-energy equity bubble along the lines of last decade's Tech Boom/Bust.
At the core of these limitations is one so basic--and seemingly so obvious--that it constantly surprises me to hear smart people tangling themselves up in its allure. Perhaps that's because many of the venture capital folks funding new energy start-ups cut their teeth on the technology of the information/telecommunications revolution. Unfortunately, green energy is not the next Internet, at least not in the sense of a wave of technology that changes everything it touches and enables the creation of a vast array of new products and services that would have been impossible without it, and even inconceivable before its arrival. That's because however novel its means of producing it, the output of renewable energy technologies is something that is really quite mature: energy in its various forms, and mainly electricity. A "green electron" is physically and functionally indistinguishable from one generated from coal, gas, fission, or any other energy source. Nor is there an energy analog to Moore's Law, the empirical relationship describing the remarkable improvements in computing power that have put the data processing power of the entire Apollo space program into your laptop.
For developed countries, the green energy proposition is focused on replacing the energy already being supplied from other sources, including coal, oil, and natural gas. This will certainly have environmental benefits, including making our energy consumption more sustainable in the long run by linking it to the perpetual energy flows around us, rather than depleting sources of fossil fuels. However, the fact that this substitution is occurring on a still-modest scale, and only as a result of substantial subsidies and incentives from all levels of government, serves as a reminder that this is hardly a case of a better/faster/cheaper innovation sweeping its inefficient predecessors out of the way. If anything, rushing headlong to implement renewable energy before it has become fully competitive with our traditional energy sources risks embedding higher energy costs into the value chains of most of the goods and services produced across the entire economy. Governments may shift the point where that burden falls, but they can't wish it away.
The proposition for developing countries is decidedly different, and that's what Mr. Friedman has grasped with the determination of a Gila monster. There's not enough coal, oil or gas in the world to enable China and India to match the per-capita income of, say, Spain, and the climate change and local air-quality consequences of their trying to get there the old way are almost unthinkable. For them renewables, along with nuclear power, represent a necessary step in their development path. It shouldn't surprise anyone to see powerful renewable energy firms emerging in these countries in much the same way that powerful railroad and oil companies emerged during our own development. Some of them will become formidable global competitors.
Mr. Friedman sees a Sputnik moment in this, though I'm a little surprised that someone who made his name explaining globalization to the US public would choose to frame it in terms of a nationalistic competition between China and the US. I'd see it as more of a key signpost for business. Globally, wind power installations have been growing at a compound average rate of 28% since 2000, and solar has been running at about the same pace. That means that the industrial capacity to supply wind turbines and solar panels has been growing at similar rates in the background. The 27,051 MW of new wind capacity installed last year represented global sales of around $60 billion worth of hardware, ignoring the associated infrastructure. Until renewables, the US energy industry hadn't seen growth rates like this since the days of rural electrification and the take-off of the motor car in the 'teens and 1920s. Still, we can't lose sight of the fact that the driver here is not market economics or engineering superiority but a bewildering array of regulations and incentives in the form of renewables mandates, tax credits, feed-in tariffs and the like, with cap & trade waiting in the wings.
In the years ahead, the growth of renewable energy and related technologies will create huge opportunities. Someone is going to make a lot of money in these new green industries, though they also come with the potential for others to lose fortunes, as rapid technology change turns many of yesterday's brightest innovations into dead ends. The history of the high-tech industry is rife with example of this. While I agree with Mr. Friedman that the US runs the risk of being left behind if we don't embrace renewable energy, that embrace must take into account the fundamental differences in relative development levels between us and China. For the present, the real bonanza in clean energy appears to lie on the side of building it and selling it into government-supported markets, rather than implementing it wholesale here, if that means scrapping trillions of dollars worth of infrastructure, plant and equipment with decades of remaining useful life.
At the core of these limitations is one so basic--and seemingly so obvious--that it constantly surprises me to hear smart people tangling themselves up in its allure. Perhaps that's because many of the venture capital folks funding new energy start-ups cut their teeth on the technology of the information/telecommunications revolution. Unfortunately, green energy is not the next Internet, at least not in the sense of a wave of technology that changes everything it touches and enables the creation of a vast array of new products and services that would have been impossible without it, and even inconceivable before its arrival. That's because however novel its means of producing it, the output of renewable energy technologies is something that is really quite mature: energy in its various forms, and mainly electricity. A "green electron" is physically and functionally indistinguishable from one generated from coal, gas, fission, or any other energy source. Nor is there an energy analog to Moore's Law, the empirical relationship describing the remarkable improvements in computing power that have put the data processing power of the entire Apollo space program into your laptop.
For developed countries, the green energy proposition is focused on replacing the energy already being supplied from other sources, including coal, oil, and natural gas. This will certainly have environmental benefits, including making our energy consumption more sustainable in the long run by linking it to the perpetual energy flows around us, rather than depleting sources of fossil fuels. However, the fact that this substitution is occurring on a still-modest scale, and only as a result of substantial subsidies and incentives from all levels of government, serves as a reminder that this is hardly a case of a better/faster/cheaper innovation sweeping its inefficient predecessors out of the way. If anything, rushing headlong to implement renewable energy before it has become fully competitive with our traditional energy sources risks embedding higher energy costs into the value chains of most of the goods and services produced across the entire economy. Governments may shift the point where that burden falls, but they can't wish it away.
The proposition for developing countries is decidedly different, and that's what Mr. Friedman has grasped with the determination of a Gila monster. There's not enough coal, oil or gas in the world to enable China and India to match the per-capita income of, say, Spain, and the climate change and local air-quality consequences of their trying to get there the old way are almost unthinkable. For them renewables, along with nuclear power, represent a necessary step in their development path. It shouldn't surprise anyone to see powerful renewable energy firms emerging in these countries in much the same way that powerful railroad and oil companies emerged during our own development. Some of them will become formidable global competitors.
Mr. Friedman sees a Sputnik moment in this, though I'm a little surprised that someone who made his name explaining globalization to the US public would choose to frame it in terms of a nationalistic competition between China and the US. I'd see it as more of a key signpost for business. Globally, wind power installations have been growing at a compound average rate of 28% since 2000, and solar has been running at about the same pace. That means that the industrial capacity to supply wind turbines and solar panels has been growing at similar rates in the background. The 27,051 MW of new wind capacity installed last year represented global sales of around $60 billion worth of hardware, ignoring the associated infrastructure. Until renewables, the US energy industry hadn't seen growth rates like this since the days of rural electrification and the take-off of the motor car in the 'teens and 1920s. Still, we can't lose sight of the fact that the driver here is not market economics or engineering superiority but a bewildering array of regulations and incentives in the form of renewables mandates, tax credits, feed-in tariffs and the like, with cap & trade waiting in the wings.
In the years ahead, the growth of renewable energy and related technologies will create huge opportunities. Someone is going to make a lot of money in these new green industries, though they also come with the potential for others to lose fortunes, as rapid technology change turns many of yesterday's brightest innovations into dead ends. The history of the high-tech industry is rife with example of this. While I agree with Mr. Friedman that the US runs the risk of being left behind if we don't embrace renewable energy, that embrace must take into account the fundamental differences in relative development levels between us and China. For the present, the real bonanza in clean energy appears to lie on the side of building it and selling it into government-supported markets, rather than implementing it wholesale here, if that means scrapping trillions of dollars worth of infrastructure, plant and equipment with decades of remaining useful life.
Friday, September 25, 2009
Misguided Incentives
Today's Wall St. Journal includes an interesting article on the emerging controversy concerning Germany's subsidies for solar power and their unintended consequences for that country's solar industry. It seems that solar incentives there have been so generous that they have discouraged German solar manufacturers from focusing on becoming competitive, rather than merely bigger. As a result, a growing share of the incentives is going to foreign firms that can sell these products cheaper. The hue and cry about this suggests that perhaps the original motivation behind the subsidy program, which not long ago was paying as much as a dollar per kilowatt-hour for power generated from solar panels, had at least as much to do with industrial policy as protecting the environment. In fact, Germany may have harmed the environment by wasting money on an impractical solution for such a cloudy place, when the same funds could have bought much greater emissions reductions in other areas of the economy. This should serve as a cautionary tale for those who are promoting similar incentives here, and for columnists--even those with a Nobel Prize in Economics--who argue that going green will be cheap. It won't be if we encourage the wrong technologies with bloated incentives.
At the heart of the solar debate in Germany is something called a "feed-in tariff" or FIT. It requires utilities to buy the output of qualifying solar power installations at a guaranteed fixed price well above the prevailing price in the power market. What's unique about the FIT compared to incentives such as the US federal renewable Production Tax Credit of 2.1 cents per kWh is that the funds to pay this green premium don't come from the government but from each utility's ratepayers. In other words, it is a mechanism for redistributing wealth from utility customers to the owners of solar installations, whether the affected ratepayers receive any solar power or not. The paradox of the FIT is that it makes the most sense when a technology is at its very earliest stages, producing so little energy that the cost to average utility customers is just pennies a month. The more solar power is produced and bought at inflated prices, the higher utility bills go and the less competitive the entire economy becomes.
So far, this just sounds like a political matter. Germany decided to nurture a large industry to build and install solar products and chose to pay for it by sending the bill to utility customers every month. That might even make a certain amount of practical sense, if not for two facts. First, the subsidy remains extravagantly generous, even after having been significantly reduced in recent years. It currently stands at a range of 34-43 €cent/kWh, depending on the kind of installation involved. At current exchange rates, that equates to $0.50-0.635/kWh. A recent study comparing levelized power costs for a variety of power technologies puts the cost of unsubsidized solar power between $0.26-.32 for the crystalline silicon photovoltaic cells that most German solar firms produce, based on an average capacity factor above 20%. After adjusting for Germany's much poorer solar intensity, the cost of solar power might rise to as much as $0.40/kWh, still well below the level of the FIT. This makes un-sunny Germany a remarkably attractive place to sell solar panels, and German companies haven't been the only ones to notice this. Suddenly the FIT looks like a means for Germans to subsidize Chinese solar firms, and that is not going down quite so well. More importantly for the success of Germany's solar industrial policy, the Journal indicates that the head of one of the country's largest solar module manufacturers is now arguing that German suppliers will not become efficient enough to compete in the global market for solar panels unless they are weaned off such generous support.
The high effective cost of the emissions reductions these subsidies are buying ought to be of equal concern to German policy makers. Even if you assume that each kWh of power generated by FIT-subsidized solar panels backs out a kWh generated from coal, the extra premium over the cost of other low-emission power sources such as wind is enormous. The difference in the average solar FIT vs. Germany's FIT for offshore wind of 13 €cent/kWh ($0.19/kWh) yields an effective cost of CO2 reduction from solar of about $400 per ton. That compares to a current price for emissions credits on the European Climate Exchange of around $19/ton CO2. The more you pay for reducing emissions, the less of them you can afford to reduce, even in a prosperous country like Germany.
At the end of the day, German politicians appear to have spent billions of Euros of German consumers' and businesses' money to build a solar industry that has thrived on the installation of high-costs solar panels in one of the least suitable countries for solar power imaginable, and that may not be able to compete internationally without drastic restructuring. This initiative has also failed dismally as climate policy, purchasing less than 5% of the emissions reductions that could have been bought had this money been spent on other, more cost-effective power technologies or on energy efficiency. The further irony is that much of the German investment in solar technology to date would have to be written off should it turn out that the current generation of technology can't be made cheaply enough under any circumstances, and crystalline silicon cells ultimately give way to cells relying on non-silicon thin-film techniques or novel nanotech-based designs. These are the perils of industrial policy masquerading as environmental policy, and it is hardly a winning case for the application of a similar FIT in the US.
At the heart of the solar debate in Germany is something called a "feed-in tariff" or FIT. It requires utilities to buy the output of qualifying solar power installations at a guaranteed fixed price well above the prevailing price in the power market. What's unique about the FIT compared to incentives such as the US federal renewable Production Tax Credit of 2.1 cents per kWh is that the funds to pay this green premium don't come from the government but from each utility's ratepayers. In other words, it is a mechanism for redistributing wealth from utility customers to the owners of solar installations, whether the affected ratepayers receive any solar power or not. The paradox of the FIT is that it makes the most sense when a technology is at its very earliest stages, producing so little energy that the cost to average utility customers is just pennies a month. The more solar power is produced and bought at inflated prices, the higher utility bills go and the less competitive the entire economy becomes.
So far, this just sounds like a political matter. Germany decided to nurture a large industry to build and install solar products and chose to pay for it by sending the bill to utility customers every month. That might even make a certain amount of practical sense, if not for two facts. First, the subsidy remains extravagantly generous, even after having been significantly reduced in recent years. It currently stands at a range of 34-43 €cent/kWh, depending on the kind of installation involved. At current exchange rates, that equates to $0.50-0.635/kWh. A recent study comparing levelized power costs for a variety of power technologies puts the cost of unsubsidized solar power between $0.26-.32 for the crystalline silicon photovoltaic cells that most German solar firms produce, based on an average capacity factor above 20%. After adjusting for Germany's much poorer solar intensity, the cost of solar power might rise to as much as $0.40/kWh, still well below the level of the FIT. This makes un-sunny Germany a remarkably attractive place to sell solar panels, and German companies haven't been the only ones to notice this. Suddenly the FIT looks like a means for Germans to subsidize Chinese solar firms, and that is not going down quite so well. More importantly for the success of Germany's solar industrial policy, the Journal indicates that the head of one of the country's largest solar module manufacturers is now arguing that German suppliers will not become efficient enough to compete in the global market for solar panels unless they are weaned off such generous support.
The high effective cost of the emissions reductions these subsidies are buying ought to be of equal concern to German policy makers. Even if you assume that each kWh of power generated by FIT-subsidized solar panels backs out a kWh generated from coal, the extra premium over the cost of other low-emission power sources such as wind is enormous. The difference in the average solar FIT vs. Germany's FIT for offshore wind of 13 €cent/kWh ($0.19/kWh) yields an effective cost of CO2 reduction from solar of about $400 per ton. That compares to a current price for emissions credits on the European Climate Exchange of around $19/ton CO2. The more you pay for reducing emissions, the less of them you can afford to reduce, even in a prosperous country like Germany.
At the end of the day, German politicians appear to have spent billions of Euros of German consumers' and businesses' money to build a solar industry that has thrived on the installation of high-costs solar panels in one of the least suitable countries for solar power imaginable, and that may not be able to compete internationally without drastic restructuring. This initiative has also failed dismally as climate policy, purchasing less than 5% of the emissions reductions that could have been bought had this money been spent on other, more cost-effective power technologies or on energy efficiency. The further irony is that much of the German investment in solar technology to date would have to be written off should it turn out that the current generation of technology can't be made cheaply enough under any circumstances, and crystalline silicon cells ultimately give way to cells relying on non-silicon thin-film techniques or novel nanotech-based designs. These are the perils of industrial policy masquerading as environmental policy, and it is hardly a winning case for the application of a similar FIT in the US.
Monday, September 21, 2009
Technology and Critical Thinking
The other day I read a story in my local paper concerning a new technology for converting waste plastic into synthetic oil. The prototype "Envion Oil Generator" had been temporarily deployed at a solid-waste facility in Montgomery County, MD, and its owners were touting its benefits to the Washington Post. As I read the article, I found myself considering it on two levels: whether the reported details made sense, and whether the reporter was encouraging his readers to approach new inventions such as this with sufficient skepticism. We're living through a nearly unprecedented explosion in energy-related technology, and it's vital that the public not swallow every claim they encounter, because a large fraction of these technologies will ultimately prove to be either impractical or uneconomical, while some of them are in fact impossible, because they depend on the violation of basic physical laws. We might not all have the background for making detailed judgments about this, but I can suggest a few questions to ask in these situations, even if you don't have a science or engineering degree.
The first question is whether the description of the basic process seems logical. For example, in the case of the "Oil Generator" is it reasonable to expect that plastic could be turned back into something like crude oil by means of essentially just heating it up? After all, plastic is mostly derived from crude oil and natural gas in the first place, so perhaps heating it would cause it to decompose back into its constituents. If you Google on "plastic recycling", you'll see that this normally entails separating it strictly by type--those little numbers in the triangle that usually appears somewhere on an item--and then melting it. But that doesn't give you "oil"; it gets you back to the raw plastic, which can be used to make clothing, carpets, or some other recycled product. However, if you heat them further under the right conditions, the polymer chains of the plastic break down in a process called "thermal depolymerization." The result of that is a liquid that might resemble crude oil. OK, so far.
The next aspect you might look at is the whether any obvious physical laws are broken. Do the claims for the device hint at something impossible, such as getting more energy or mass out than are put into it? For example, the article indicates that this device can turn 10,000 tons of plastic per year into up to 60,000 barrels of oil. Is that plausible? A little Googling should turn up the fact that a typical crude oil has a specific gravity of around 0.85. That means that a gallon of it would weigh just over 7 lb., and a 42-gallon barrel would come in just under 300 lb., or 0.15 short tons. So the claim here is that 10,000 tons of plastic could turn into as much as 9,000 tons of usable oil. Personally, I'd say that sounds pretty optimistic, and I'd guess that a yield under 5 barrels per ton was likelier, particularly if the gas produced as a byproduct from the process is supposed to generate most of the energy for this conversion. At a minimum, though, this gizmo doesn't appear to bend any physical laws.
If you know a bit of organic chemistry, you could delve a little further into this, looking up the chemical structure of such common plastics as Polyethylene Terephthalate (PET or Type 1), Polystyrene (Type 5), and Polyvinyl Chloride (PVC or Type 3). De-polymerizing a random mix of those is either going to yield a stew of specialized petrochemical molecules, or if you break them down further you might get back to more basic chemicals full of double bonds and benzene rings. Neither result has much in common with the typical constituents of good-quality crude oil that refineries turn into gasoline, diesel or jet fuel, so it raises a key question about the value of the product this technology produces.
That brings us to the economics. The article quotes the company as claiming that the process costs only $10 per barrel of oil produced. It's not clear whether that $10 is just the operating cost or is meant to include the capital cost of the device, which apparently totals $6-7 million. Using the "PMT" function in Excel it took about 1 minute to determine that at an 8% cost of capital--about the best a small business could hope for in the current environment--the amortized hardware cost would be at least $611,000 per year over a 20-year life. Spread that over 60,000 bbls and you're already over $10/bbl, before you've paid for the first employee or the first kWh of purchased electricity. And since a device like this is unlikely to operate around the clock every day of the year, and the realistic yield is probably lower than 6 bbls/ton, it's not hard to come up with an effective fixed cost per barrel of around $20, over and above whatever variable costs are involved.
And then we come to the environmental impact of all this, and that hinges on assessing realistic alternatives. If the plastic would otherwise be buried in a landfill, this looks like a win-win, as long as the process complies with all local pollution regulations for stationary sources. However, if the device is chewing up plastic that could otherwise be recycled, the latter seems by far the better route, in terms of energy consumption and displacement of oil byproducts that would otherwise be used to make virgin plastic. It's also clear that a significant fraction of the input plastic is converted to CO2 and emitted to the atmosphere. Whether its emissions are higher or lower than those associated with burying the waste and producing new plastic isn't obvious.
Ultimately, all we can really conclude about the Oil Generator is that if it operates as advertised--a big if for any new technology--and if there is indeed a viable market for its output at some discount to crude oil, then this might leave a reasonable profit margin for the owners. That would also depend on how much rent the operators must pay, if any, for the land it sits on, how much plastic they could really run through it, and whether they would have to pay for that plastic or might even get paid to dispose of it. This is not meant as an endorsement of the company's claims, but then that wasn't the point of this exercise, which was more about taking my readers through the application of some basic critical thinking. Although the Post reporter didn't undertake all this analysis, he at least included a suitably skeptical viewpoint, instead of giving in to the breathless enthusiasm that seems so prevalent these days in reporting on any new technology with an environmental angle.
The first question is whether the description of the basic process seems logical. For example, in the case of the "Oil Generator" is it reasonable to expect that plastic could be turned back into something like crude oil by means of essentially just heating it up? After all, plastic is mostly derived from crude oil and natural gas in the first place, so perhaps heating it would cause it to decompose back into its constituents. If you Google on "plastic recycling", you'll see that this normally entails separating it strictly by type--those little numbers in the triangle that usually appears somewhere on an item--and then melting it. But that doesn't give you "oil"; it gets you back to the raw plastic, which can be used to make clothing, carpets, or some other recycled product. However, if you heat them further under the right conditions, the polymer chains of the plastic break down in a process called "thermal depolymerization." The result of that is a liquid that might resemble crude oil. OK, so far.
The next aspect you might look at is the whether any obvious physical laws are broken. Do the claims for the device hint at something impossible, such as getting more energy or mass out than are put into it? For example, the article indicates that this device can turn 10,000 tons of plastic per year into up to 60,000 barrels of oil. Is that plausible? A little Googling should turn up the fact that a typical crude oil has a specific gravity of around 0.85. That means that a gallon of it would weigh just over 7 lb., and a 42-gallon barrel would come in just under 300 lb., or 0.15 short tons. So the claim here is that 10,000 tons of plastic could turn into as much as 9,000 tons of usable oil. Personally, I'd say that sounds pretty optimistic, and I'd guess that a yield under 5 barrels per ton was likelier, particularly if the gas produced as a byproduct from the process is supposed to generate most of the energy for this conversion. At a minimum, though, this gizmo doesn't appear to bend any physical laws.
If you know a bit of organic chemistry, you could delve a little further into this, looking up the chemical structure of such common plastics as Polyethylene Terephthalate (PET or Type 1), Polystyrene (Type 5), and Polyvinyl Chloride (PVC or Type 3). De-polymerizing a random mix of those is either going to yield a stew of specialized petrochemical molecules, or if you break them down further you might get back to more basic chemicals full of double bonds and benzene rings. Neither result has much in common with the typical constituents of good-quality crude oil that refineries turn into gasoline, diesel or jet fuel, so it raises a key question about the value of the product this technology produces.
That brings us to the economics. The article quotes the company as claiming that the process costs only $10 per barrel of oil produced. It's not clear whether that $10 is just the operating cost or is meant to include the capital cost of the device, which apparently totals $6-7 million. Using the "PMT" function in Excel it took about 1 minute to determine that at an 8% cost of capital--about the best a small business could hope for in the current environment--the amortized hardware cost would be at least $611,000 per year over a 20-year life. Spread that over 60,000 bbls and you're already over $10/bbl, before you've paid for the first employee or the first kWh of purchased electricity. And since a device like this is unlikely to operate around the clock every day of the year, and the realistic yield is probably lower than 6 bbls/ton, it's not hard to come up with an effective fixed cost per barrel of around $20, over and above whatever variable costs are involved.
And then we come to the environmental impact of all this, and that hinges on assessing realistic alternatives. If the plastic would otherwise be buried in a landfill, this looks like a win-win, as long as the process complies with all local pollution regulations for stationary sources. However, if the device is chewing up plastic that could otherwise be recycled, the latter seems by far the better route, in terms of energy consumption and displacement of oil byproducts that would otherwise be used to make virgin plastic. It's also clear that a significant fraction of the input plastic is converted to CO2 and emitted to the atmosphere. Whether its emissions are higher or lower than those associated with burying the waste and producing new plastic isn't obvious.
Ultimately, all we can really conclude about the Oil Generator is that if it operates as advertised--a big if for any new technology--and if there is indeed a viable market for its output at some discount to crude oil, then this might leave a reasonable profit margin for the owners. That would also depend on how much rent the operators must pay, if any, for the land it sits on, how much plastic they could really run through it, and whether they would have to pay for that plastic or might even get paid to dispose of it. This is not meant as an endorsement of the company's claims, but then that wasn't the point of this exercise, which was more about taking my readers through the application of some basic critical thinking. Although the Post reporter didn't undertake all this analysis, he at least included a suitably skeptical viewpoint, instead of giving in to the breathless enthusiasm that seems so prevalent these days in reporting on any new technology with an environmental angle.
Thursday, September 17, 2009
Overproducing US Oil?
Tuesday morning I dialed into an API media teleconference concerning the administration's latest proposals on energy taxation and access. During the call API's President, Jack Gerard, mentioned the recent Congressional testimony of a Treasury Dept. official who suggested that current policies were promoting "overproduction of US oil and gas." That remark struck me as so absurd that I later asked for the reference, so that I could confirm what had actually been said. In fact, the written testimony of Alan Krueger, Assistant Secretary for Economic Policy and Chief Economist of the US Treasury, before the Subcommittee on Energy, Natural Resources and Infrastructure of the Senate Finance Committee included that statement and others in a similar vein. According to Dr. Krueger, the US oil & gas industry has benefited from a set of tax policies and incentives that have steered too much of the nation's capital investment towards energy and away from other sectors. In his view, removing those incentives would increase federal revenue by some $30 billion per year and create a "level playing field" for other forms of energy, while resulting in only insignificant reductions in US oil & gas output, with a negligible impact on our energy security. While his opinions might be shared by plenty of Americans, they reflect an excessive adherence to theory, ignoring the geopolitical circumstances in which global energy markets operate. And on a more basic level, his numbers don't even add up.
It's hard to know where to begin in analyzing Dr. Krueger's remarks. Perhaps the best starting point is the limited zone of agreement between his views and mine. From his comments about greenhouse gas emissions, I assume we share a deep concern about climate change and the contribution of fossil fuels to this problem. Reducing our emissions will require us to consume progressively less of these fuels in the years ahead, and improved energy efficiency and alternative energy production are important strategies for achieving that result. However, Dr. Krueger seems to believe that constraining domestic oil & gas production is another appropriate strategy for addressing climate change. I hope that view is merely his own and not widely shared in the administration, because it represents a horribly inefficient way to reduce emissions, at a shockingly high cost to the US economy. As I've noted many times, most of the emissions from oil and gas come from their consumption, not their production, and merely offshoring the upstream emissions associated with the oil and gas we consume would do nothing at all for global climate change, while reducing US economic output, employment, and energy security and increasing our trade deficit. In this regard the needs of energy security and climate change are perfectly aligned on the necessity of reducing our use of imported oil. Domestic oil and gas are not the enemy; they are part of the solution, and no reasonably informed person would suggest we produce too much oil.
Then there's the notion of a "level playing field," which in this case is fatally flawed for at least two reasons that should be obvious from the most cursory inspection of the issue. First, the global oil market does not conform to anyone's notion of a level playing field. The chief economist of my old firm used to preface many of his comments on oil prices by reminding his audience that the entire oil market was based on turning conventional economics on its head. If the oil market matched economic theory, the lowest cost producers would be going flat out all the time, and only enough high-cost oil from places like the US, UK, etc. would turn up to balance supply & demand. On that basis, I imagine OPEC would be producing 70 or 80% of the world's oil, and the US wouldn't be importing 57% of our crude oil needs, but perhaps 90%, because many US producers would slide right off the edge of that level playing field. Of course that wouldn't be a problem, because in that pure world no OPEC member would ever think of cutting output to raise prices, or of using oil as a geopolitical lever.
The other obvious fact undermining Dr. Krueger's hope for a level playing field arises from his administration's own policies--and those of the last several administrations--with regard to renewable energy. We have tilted the playing field quite far from the level in favor of corn ethanol and electricity from wind and a variety of other renewable sources. Putting all of these incentives into common, more familiar units might help to illustrate just how un-level we have made the field. Consider ethanol, which receives a Volumetric Excise Tax Credit, a.k.a. "blenders' credit" of $0.45 per gallon. That's $18.90 per volumetric barrel, though when we adjust for ethanol's much lower energy content compared to petroleum products, it works out to an effective rate of $32 per barrel of oil-equivalent energy (BOE). Wind power and other renewable electricity sources are eligible for a federal Production Tax Credit of $0.021/kWh generated. Assuming that they back out mainly power generated from natural gas, that works out to an effective subsidy of $2.33 per million BTUs (63% of the current spot natural gas price) or $13.40/BOE. Now let's compare those figures to that $30 billion the government could collect by closing tax loopholes that benefit oil and gas.
If you have a gut feeling that the subsidy per BOE of oil and gas would be much lower than for renewables, give yourself a gold star. The reason the incentives in question are lower is that the denominator is so large. When you add 2008 US domestic production of crude oil, natural gas, and natural gas liquids on an oil-equivalent basis, it works out to a shade over 6 billion barrels. As a result, that $30 billion worth of incentives equates to just $5 per barrel, or 12 cents per gallon, which is not only less than the incentives for renewable energy--the production of some of which appears to be no better for the environment than oil--but also less than the federal excise tax on gasoline. And while Dr. Krueger expressed concern that US lease terms for offshore oil production in the Gulf of Mexico were more generous than those of other producing countries, he does not appear to have factored in the effective 40% federal income tax rate on the earnings of the companies producing oil & gas from those fields.
Now, I can't say that taking $5 per bbl away from the domestic oil & gas industry would cripple it. At this point, the industry is pretty healthy, though not nearly as healthy as it was a year or two ago. But even in a world of $70 per barrel oil, and with US natural gas currently trading at a much lower equivalent price of $21/bbl, that $5 looks like a significant deterrent to investing in more production here--production that would contribute essentially net-zero to global greenhouse gas emissions but that would back out foreign oil and gas imports on a direct, barrel-for-barrel basis. With a lifetime of experience in that industry, I don't need an economic model to know that Dr. Krueger's estimate of losing only "one-half of one percent" of domestic oil & gas output defies common sense and looks suspiciously like a manifestation of "garbage in, garbage out".
There is legitimate debate over the best way to address the externalities associated with our use of oil and gas and the emissions they create, and I come down squarely on the side of recognizing the emissions externality via the mechanism of cap & trade--though not in the grossly-distorted
form inherent in Waxman-Markey. That's an entirely different kettle of fish than making US hydrocarbon production less competitive with the imported oil and gas with which it must contend, in a global market that is anything but level, thanks to OPEC and the consequences of resource nationalism. A quick review of Dr. Krueger's impressive bio suggests that his main expertise lies in the economics of education and labor. It is clearly not in energy. We live in a world in which the geopolitics of energy are so challenging, and in which the EU subsidizes airliners, while China apparently subsidizes tire makers, and any number of countries--now including ours--subsidize carmakers. In that context, a modest level of incentives for the production of domestic energy from a variety of sources, including oil and gas, doesn't look so extraordinary. If anything, it's sensible and prudent.
It's hard to know where to begin in analyzing Dr. Krueger's remarks. Perhaps the best starting point is the limited zone of agreement between his views and mine. From his comments about greenhouse gas emissions, I assume we share a deep concern about climate change and the contribution of fossil fuels to this problem. Reducing our emissions will require us to consume progressively less of these fuels in the years ahead, and improved energy efficiency and alternative energy production are important strategies for achieving that result. However, Dr. Krueger seems to believe that constraining domestic oil & gas production is another appropriate strategy for addressing climate change. I hope that view is merely his own and not widely shared in the administration, because it represents a horribly inefficient way to reduce emissions, at a shockingly high cost to the US economy. As I've noted many times, most of the emissions from oil and gas come from their consumption, not their production, and merely offshoring the upstream emissions associated with the oil and gas we consume would do nothing at all for global climate change, while reducing US economic output, employment, and energy security and increasing our trade deficit. In this regard the needs of energy security and climate change are perfectly aligned on the necessity of reducing our use of imported oil. Domestic oil and gas are not the enemy; they are part of the solution, and no reasonably informed person would suggest we produce too much oil.
Then there's the notion of a "level playing field," which in this case is fatally flawed for at least two reasons that should be obvious from the most cursory inspection of the issue. First, the global oil market does not conform to anyone's notion of a level playing field. The chief economist of my old firm used to preface many of his comments on oil prices by reminding his audience that the entire oil market was based on turning conventional economics on its head. If the oil market matched economic theory, the lowest cost producers would be going flat out all the time, and only enough high-cost oil from places like the US, UK, etc. would turn up to balance supply & demand. On that basis, I imagine OPEC would be producing 70 or 80% of the world's oil, and the US wouldn't be importing 57% of our crude oil needs, but perhaps 90%, because many US producers would slide right off the edge of that level playing field. Of course that wouldn't be a problem, because in that pure world no OPEC member would ever think of cutting output to raise prices, or of using oil as a geopolitical lever.
The other obvious fact undermining Dr. Krueger's hope for a level playing field arises from his administration's own policies--and those of the last several administrations--with regard to renewable energy. We have tilted the playing field quite far from the level in favor of corn ethanol and electricity from wind and a variety of other renewable sources. Putting all of these incentives into common, more familiar units might help to illustrate just how un-level we have made the field. Consider ethanol, which receives a Volumetric Excise Tax Credit, a.k.a. "blenders' credit" of $0.45 per gallon. That's $18.90 per volumetric barrel, though when we adjust for ethanol's much lower energy content compared to petroleum products, it works out to an effective rate of $32 per barrel of oil-equivalent energy (BOE). Wind power and other renewable electricity sources are eligible for a federal Production Tax Credit of $0.021/kWh generated. Assuming that they back out mainly power generated from natural gas, that works out to an effective subsidy of $2.33 per million BTUs (63% of the current spot natural gas price) or $13.40/BOE. Now let's compare those figures to that $30 billion the government could collect by closing tax loopholes that benefit oil and gas.
If you have a gut feeling that the subsidy per BOE of oil and gas would be much lower than for renewables, give yourself a gold star. The reason the incentives in question are lower is that the denominator is so large. When you add 2008 US domestic production of crude oil, natural gas, and natural gas liquids on an oil-equivalent basis, it works out to a shade over 6 billion barrels. As a result, that $30 billion worth of incentives equates to just $5 per barrel, or 12 cents per gallon, which is not only less than the incentives for renewable energy--the production of some of which appears to be no better for the environment than oil--but also less than the federal excise tax on gasoline. And while Dr. Krueger expressed concern that US lease terms for offshore oil production in the Gulf of Mexico were more generous than those of other producing countries, he does not appear to have factored in the effective 40% federal income tax rate on the earnings of the companies producing oil & gas from those fields.
Now, I can't say that taking $5 per bbl away from the domestic oil & gas industry would cripple it. At this point, the industry is pretty healthy, though not nearly as healthy as it was a year or two ago. But even in a world of $70 per barrel oil, and with US natural gas currently trading at a much lower equivalent price of $21/bbl, that $5 looks like a significant deterrent to investing in more production here--production that would contribute essentially net-zero to global greenhouse gas emissions but that would back out foreign oil and gas imports on a direct, barrel-for-barrel basis. With a lifetime of experience in that industry, I don't need an economic model to know that Dr. Krueger's estimate of losing only "one-half of one percent" of domestic oil & gas output defies common sense and looks suspiciously like a manifestation of "garbage in, garbage out".
There is legitimate debate over the best way to address the externalities associated with our use of oil and gas and the emissions they create, and I come down squarely on the side of recognizing the emissions externality via the mechanism of cap & trade--though not in the grossly-distorted
form inherent in Waxman-Markey. That's an entirely different kettle of fish than making US hydrocarbon production less competitive with the imported oil and gas with which it must contend, in a global market that is anything but level, thanks to OPEC and the consequences of resource nationalism. A quick review of Dr. Krueger's impressive bio suggests that his main expertise lies in the economics of education and labor. It is clearly not in energy. We live in a world in which the geopolitics of energy are so challenging, and in which the EU subsidizes airliners, while China apparently subsidizes tire makers, and any number of countries--now including ours--subsidize carmakers. In that context, a modest level of incentives for the production of domestic energy from a variety of sources, including oil and gas, doesn't look so extraordinary. If anything, it's sensible and prudent.
Wednesday, September 16, 2009
Mega Gas Project
I took some pride in Chevron's announcement earlier this week that it and its partners would proceed with construction of the Gorgon LNG plant in Australia. That's partly due to my vicarious interest in this project as a Chevron shareholder, but mainly from my peripheral involvement in the early stages of planning and thinking about it when I worked at Texaco. Prior to merging with Chevron, Texaco held a 25% interest in the Gorgon natural gas field, as did Chevron, ExxonMobil, and Shell. Because of the scale of the resource involved, even that one-quarter share was enough to make Gorgon potentially one of Texaco's most valuable long-term assets. However, the technical complexity of the project, combined with the uncertainties about the future global gas market, made it difficult to create the necessary consensus among the partners about how best to proceed. In retrospect, it probably took the merger to give one party a big enough stake in the project to drive it forward.
At a planned production rate of 15 million tons per year of liquefied natural gas (LNG) and 300 terajoules per day of pipeline gas for use on the mainland, it's a little hard to put the scale of the project in perspective. It works out to around 2.2 billion cubic feet per day of total natural gas delivery, which is equivalent to the entire production of the largest independent US gas driller, Chesapeake Energy Corp., one of the most aggressive developers of the shale gas deposits that are transforming the US natural gas market. If Gorgon's entire output were sent to gas turbine power plants, it would generate around 85 billion kilowatt-hours per year, as much as 32,000 MW of wind turbines or 9 nuclear power plants of 1200 MW each--and over a similar 40 year operating life. However you look at it, it's big.
Among the challenges the field's owners needed to overcome in order to get to this point was a plan for handling the relatively high CO2 content of the gas in the Gorgon field, at around 12%. Even a decade ago, it was becoming clear that such large quantities of CO2 could not simply be vented to the atmosphere. According to Chevron's fact sheet for the project, the CO2 content of the gas will be separated and sequestered in geological reservoirs under Barrow Island, where the LNG plant will be located, and it will apparently rank among the world's largest carbon capture and sequestration (CCS) projects to date, with total storage of up to 120 million tons of CO2 over the life of the project.
Of course, that doesn't negate the entire greenhouse gas impact of such a project, which must be compared to the emissions that would occur if it didn't proceed. Chilling natural gas to -260 °F, at which it becomes a liquid, requires a significant expenditure of energy, typically generated by burning more gas. As a result, the lifecycle emissions of LNG are somewhat higher than those for pipeline gas, though they are still substantially less than from the coal or oil it would displace in power generation in the Asian market for which most of Gorgon's output is slated. According to a recent study by Pace Consultants, the emissions from gas liquefaction, LNG transportation, and re-gasification at destination would effectively increase the lifecycle emissions from a combined-cycle power plant by roughly 22%, compared to one running on domestic (pipeline) gas. However, that result would still come in around 40% lower than the emissions from the best coal-fired power technology without CCS, and 60% less than typical coal-fired power plants.
Technology has also advanced in other areas, since the Gorgon field was first discovered in the early 1980s. The idea of developing Gorgon and the nearby fields such as Jansz and Chrysaor using sub-sea completions, with no surface platform standing above them, is a reflection of how far the state of the art has come since then. The comparison of Gorgon's offshore and onshore footprint to Australia's other giant offshore gas field, the Northwest Shelf, which was developed in that timeframe using then-current technology, is remarkable. As one of the videos on Chevron's Gorgon sitelet points out, the development also had to be done in a manner that was harmonious with the nature preserve on Barrow Island. That complicated the permitting process and added additional years to the development timeline.
And that's really my key take-away for this project. While a variety of factors contributed to Gorgon's requiring something like 33 years from discovery to first production, big energy projects aren't like building a supermarket or office park. Aside from the great patience these efforts require, large sums of money must be spent over a long span of time before the first dollar of revenue can be collected to recoup them. That requires the deepest of pockets and the most meticulous strategic and financial planning. Only governments and the very largest companies--with massive free cash-flow or debt capacity--can pull this off. Moreover, because of the numerous risks associated with geology, permitting and development, a project like this works best when that risk is shared by more than one party, each of which has a portfolio of sufficient size and diversity to absorb the delays that are inherent in such ventures. So while it's true that the oil Super Majors need big LNG projects to bolster reserve replacement and cash flows that are being pinched by the challenges of gaining access to large-scale oil projects in the current environment, the global supply of clean gas from such projects would be much lower, without companies on this scale to develop them. This is a match that is both good for business and good for the long-term decarbonization of global energy supplies.
At a planned production rate of 15 million tons per year of liquefied natural gas (LNG) and 300 terajoules per day of pipeline gas for use on the mainland, it's a little hard to put the scale of the project in perspective. It works out to around 2.2 billion cubic feet per day of total natural gas delivery, which is equivalent to the entire production of the largest independent US gas driller, Chesapeake Energy Corp., one of the most aggressive developers of the shale gas deposits that are transforming the US natural gas market. If Gorgon's entire output were sent to gas turbine power plants, it would generate around 85 billion kilowatt-hours per year, as much as 32,000 MW of wind turbines or 9 nuclear power plants of 1200 MW each--and over a similar 40 year operating life. However you look at it, it's big.
Among the challenges the field's owners needed to overcome in order to get to this point was a plan for handling the relatively high CO2 content of the gas in the Gorgon field, at around 12%. Even a decade ago, it was becoming clear that such large quantities of CO2 could not simply be vented to the atmosphere. According to Chevron's fact sheet for the project, the CO2 content of the gas will be separated and sequestered in geological reservoirs under Barrow Island, where the LNG plant will be located, and it will apparently rank among the world's largest carbon capture and sequestration (CCS) projects to date, with total storage of up to 120 million tons of CO2 over the life of the project.
Of course, that doesn't negate the entire greenhouse gas impact of such a project, which must be compared to the emissions that would occur if it didn't proceed. Chilling natural gas to -260 °F, at which it becomes a liquid, requires a significant expenditure of energy, typically generated by burning more gas. As a result, the lifecycle emissions of LNG are somewhat higher than those for pipeline gas, though they are still substantially less than from the coal or oil it would displace in power generation in the Asian market for which most of Gorgon's output is slated. According to a recent study by Pace Consultants, the emissions from gas liquefaction, LNG transportation, and re-gasification at destination would effectively increase the lifecycle emissions from a combined-cycle power plant by roughly 22%, compared to one running on domestic (pipeline) gas. However, that result would still come in around 40% lower than the emissions from the best coal-fired power technology without CCS, and 60% less than typical coal-fired power plants.
Technology has also advanced in other areas, since the Gorgon field was first discovered in the early 1980s. The idea of developing Gorgon and the nearby fields such as Jansz and Chrysaor using sub-sea completions, with no surface platform standing above them, is a reflection of how far the state of the art has come since then. The comparison of Gorgon's offshore and onshore footprint to Australia's other giant offshore gas field, the Northwest Shelf, which was developed in that timeframe using then-current technology, is remarkable. As one of the videos on Chevron's Gorgon sitelet points out, the development also had to be done in a manner that was harmonious with the nature preserve on Barrow Island. That complicated the permitting process and added additional years to the development timeline.
And that's really my key take-away for this project. While a variety of factors contributed to Gorgon's requiring something like 33 years from discovery to first production, big energy projects aren't like building a supermarket or office park. Aside from the great patience these efforts require, large sums of money must be spent over a long span of time before the first dollar of revenue can be collected to recoup them. That requires the deepest of pockets and the most meticulous strategic and financial planning. Only governments and the very largest companies--with massive free cash-flow or debt capacity--can pull this off. Moreover, because of the numerous risks associated with geology, permitting and development, a project like this works best when that risk is shared by more than one party, each of which has a portfolio of sufficient size and diversity to absorb the delays that are inherent in such ventures. So while it's true that the oil Super Majors need big LNG projects to bolster reserve replacement and cash flows that are being pinched by the challenges of gaining access to large-scale oil projects in the current environment, the global supply of clean gas from such projects would be much lower, without companies on this scale to develop them. This is a match that is both good for business and good for the long-term decarbonization of global energy supplies.
Monday, September 14, 2009
Fuel Cell Trains
I often use my gym time to catch up on interesting podcasts, and NPR's excellent Science Friday series is one of my favorite sources. I just caught up with a recent segment on the development of hydrogen-powered trains, which seem like a particularly clever use of a promising technology that must still overcome serious obstacles in its automotive applications. But while I give the host, Ira Flatow, credit for pursuing the question of where the hydrogen for trains would come from, his guests' answers left something to be desired. That's not just because they tended to downplay the emissions associated with producing hydrogen, but because this omission might result in ignoring what could be an even better, more efficient fuel-cell configuration for trains and other large vehicles.
The basic idea of powering trains with fuel cells offers several important advantages--and one very serious disadvantage--for rail companies and their stakeholders. It also represents a less revolutionary change for rail than for automobiles, since trains are already partially or wholly-electrified, and a fuel cell is just another way to generate that electricity. Even the diesel locomotives that fuel-cell locos would be intended to replace are really diesel-electric hybrids. The key benefits of using fuel cells instead of big diesels for this application include substantial reductions in local pollutants, including soot, along with much quieter operation. Unfortunately, even if fuel cell trains could circumvent many of the infrastructure hurdles that have impeded automotive fuel cells, they still look prohibitively expensive. Diesels are pretty cheap on the basis of $ per kilowatt of generating capacity, while fuel cells are still much pricier, by at least a factor of 10.
Ignoring cost, fuel cell trains would face fewer obstacles to wide-scale deployment than fuel cell cars. As one of the program's guests pointed out, hydrogen storage, the Achilles heel of fuel cell cars, is not a problem in this situation. If necessary, a fuel cell train could carry an entire tank-car of compressed hydrogen behind the locomotive, and it wouldn't alter the train's performance or cost appreciably. That would also reduce the need for a widely-dispersed refueling infrastructure. For that matter, a train could carry along its own refueling set-up, in the form of an electrolyzer and compressor. It would require only fresh water--reminiscent of the coal-burning locos of yore--and a place to plug in. However, when you follow that plug back to its ultimate source, you find that the CO2 emissions of a hydrogen train could be quite a bit higher than zero, and possibly even higher than those of the diesel train it would replace, because our power generating mix is still dominated by fossil fuels.
So whether the H2 for a fuel cell train would be produced from natural gas, as most of the substantial quantity of industrial H2 in the US is, or from grid electricity, it results in CO2 emissions somewhere. In fact, because electrolysis of water into H2 is only about 80% efficient, the associated emissions of electrolytic H2 used to fuel a train would be 25% higher than the average of the grid power used to produce it. And although it's theoretically possible to generate H2 solely from off-peak renewable electricity when the latter is not being used to back out higher-emitting power sources, the capital cost of that route is much higher, because it would only operate a small fraction of the time. At least for the near-to-medium term, most H2 will likely be generated from natural gas, and that argues for a very different configuration for the fuel cell train than the one considered in this episode of Science Friday. Instead of using low-temperature automotive-design fuel cells, which require a source of pure H2, a high-temperature fuel cell of the type used for stationary power generation might make more sense. Not only do these operate more efficiently, resulting in lower overall emissions, but they can also run directly on natural gas and other light hydrocarbons, producing the H2 they require internally, rather than externally. In that case, the fuel tank for a fuel cell locomotive might just be an ordinary propane tank car, for which the entire supply chain is already well-developed.
If you've ever waited for a train in an underground or partially-enclosed station with several diesel locomotives idling away, you'll probably join me in wishing the hydrogen train test project team good luck with this initiative. The benefits of converting trains to fuel cells seem obvious, assuming this can ever be done at a competitive cost. At the same time, I hope the developers will take a broader view of hydrogen as not just another fuel, but as part of our overall energy ecology. That might lead them to an even more viable, beneficial result, with a better chance of showing up in real train yards, and eventually even passenger trains.
The basic idea of powering trains with fuel cells offers several important advantages--and one very serious disadvantage--for rail companies and their stakeholders. It also represents a less revolutionary change for rail than for automobiles, since trains are already partially or wholly-electrified, and a fuel cell is just another way to generate that electricity. Even the diesel locomotives that fuel-cell locos would be intended to replace are really diesel-electric hybrids. The key benefits of using fuel cells instead of big diesels for this application include substantial reductions in local pollutants, including soot, along with much quieter operation. Unfortunately, even if fuel cell trains could circumvent many of the infrastructure hurdles that have impeded automotive fuel cells, they still look prohibitively expensive. Diesels are pretty cheap on the basis of $ per kilowatt of generating capacity, while fuel cells are still much pricier, by at least a factor of 10.
Ignoring cost, fuel cell trains would face fewer obstacles to wide-scale deployment than fuel cell cars. As one of the program's guests pointed out, hydrogen storage, the Achilles heel of fuel cell cars, is not a problem in this situation. If necessary, a fuel cell train could carry an entire tank-car of compressed hydrogen behind the locomotive, and it wouldn't alter the train's performance or cost appreciably. That would also reduce the need for a widely-dispersed refueling infrastructure. For that matter, a train could carry along its own refueling set-up, in the form of an electrolyzer and compressor. It would require only fresh water--reminiscent of the coal-burning locos of yore--and a place to plug in. However, when you follow that plug back to its ultimate source, you find that the CO2 emissions of a hydrogen train could be quite a bit higher than zero, and possibly even higher than those of the diesel train it would replace, because our power generating mix is still dominated by fossil fuels.
So whether the H2 for a fuel cell train would be produced from natural gas, as most of the substantial quantity of industrial H2 in the US is, or from grid electricity, it results in CO2 emissions somewhere. In fact, because electrolysis of water into H2 is only about 80% efficient, the associated emissions of electrolytic H2 used to fuel a train would be 25% higher than the average of the grid power used to produce it. And although it's theoretically possible to generate H2 solely from off-peak renewable electricity when the latter is not being used to back out higher-emitting power sources, the capital cost of that route is much higher, because it would only operate a small fraction of the time. At least for the near-to-medium term, most H2 will likely be generated from natural gas, and that argues for a very different configuration for the fuel cell train than the one considered in this episode of Science Friday. Instead of using low-temperature automotive-design fuel cells, which require a source of pure H2, a high-temperature fuel cell of the type used for stationary power generation might make more sense. Not only do these operate more efficiently, resulting in lower overall emissions, but they can also run directly on natural gas and other light hydrocarbons, producing the H2 they require internally, rather than externally. In that case, the fuel tank for a fuel cell locomotive might just be an ordinary propane tank car, for which the entire supply chain is already well-developed.
If you've ever waited for a train in an underground or partially-enclosed station with several diesel locomotives idling away, you'll probably join me in wishing the hydrogen train test project team good luck with this initiative. The benefits of converting trains to fuel cells seem obvious, assuming this can ever be done at a competitive cost. At the same time, I hope the developers will take a broader view of hydrogen as not just another fuel, but as part of our overall energy ecology. That might lead them to an even more viable, beneficial result, with a better chance of showing up in real train yards, and eventually even passenger trains.
Thursday, September 10, 2009
The Sun or the Atom
It looks like we might finally see a solar power installation built on a large enough scale to enable meaningful comparisons between it and our current largest low-emission energy source, nuclear power. Tuesday's announcement by First Solar, Inc. that it had negotiated a memorandum of understanding with the Chinese government to install up to 2,000 MW of capacity in Inner Mongolia could take solar out of the world of rooftops and into direct competition with central power plants. It also provides an opportunity to assess this technology on a more consistent basis with our other full-scale energy options, even if it's clear that they ultimately serve somewhat different portions of the power market.
For years I've been reading suggestions for covering large swaths of desert with solar panels, and this looks like the largest realistic proposal so far, involving 25 square miles of desert near the city of Ordos, China. While the Desertec project in North Africa might ultimately be much bigger, that still looks like a much more remote possibility, at this point, though it was also clear from First Solar's press release that their project in China will start at a modest scale of 30 MW and work its way up from there. I can't help wondering if some of the project's later phases might be contingent on continuing to reduce the cost of solar power from today's levels. As I noted recently, even with solar module costs below $1/Watt for First Solar's thin-film technology, non-module costs can still push total installed costs above $4/W. That would put the Ordos project in roughly the same category as a new nuclear power plant in terms of total cost, not just notional output.
And while we're looking at output, we ought to consider how comparable an installation of 2,000 MW of solar panels anywhere on earth would really be to two coal-fired power plants, as was mentioned in several news reports on this story. Although I couldn't find data specifying the actual annual number of peak-sun hours for Ordos City, a glance at this solar irradiance map of China suggests that this location gets around 6 kW/m2/day, equal to 6 peak-sun hours per day, on average. That gives this project an average capacity factor of 0.25, which means that 2,000 MW of peak solar power would generate roughly the same amount of electricity annually as one 700 MW coal-fired power plant or a single 550 MW nuclear power plant, if there were such a thing. Perhaps this project's biggest benefit is in its scalability. Unlike a new nuke, which would probably take about as long to build, the Chinese won't need to wait until the project was completed in 2019 to get useful electricity from it. Each sub-project would stand on its own, and the first one could start generating within a year or two.
On balance, then, this huge solar project could produce as much peak power as a pair of nuclear power plants (or large coal-fired plants)--though still quite a bit less than either of those technologies over the course of a year--while costing about as much as one large nuclear reactor, even allowing for significant cost improvement between the time the first and last solar panels are installed. How useful such a facility will be is largely a function of whether that region of China has a greater need for lots of power when the sun happens to shine, or reliable power around the clock. I'm as pleased as anyone that China appears to be diversifying its energy mix away from coal, even to a modest degree, and there's certainly nothing about building such a facility that precludes expanding nuclear power, since in the long run the country is likely to need lots more of both. Still, in terms of bang for the buck and without factoring in what this one project might do to help bring down the cost of solar power elsewhere, it hardly seems an obvious choice.
For years I've been reading suggestions for covering large swaths of desert with solar panels, and this looks like the largest realistic proposal so far, involving 25 square miles of desert near the city of Ordos, China. While the Desertec project in North Africa might ultimately be much bigger, that still looks like a much more remote possibility, at this point, though it was also clear from First Solar's press release that their project in China will start at a modest scale of 30 MW and work its way up from there. I can't help wondering if some of the project's later phases might be contingent on continuing to reduce the cost of solar power from today's levels. As I noted recently, even with solar module costs below $1/Watt for First Solar's thin-film technology, non-module costs can still push total installed costs above $4/W. That would put the Ordos project in roughly the same category as a new nuclear power plant in terms of total cost, not just notional output.
And while we're looking at output, we ought to consider how comparable an installation of 2,000 MW of solar panels anywhere on earth would really be to two coal-fired power plants, as was mentioned in several news reports on this story. Although I couldn't find data specifying the actual annual number of peak-sun hours for Ordos City, a glance at this solar irradiance map of China suggests that this location gets around 6 kW/m2/day, equal to 6 peak-sun hours per day, on average. That gives this project an average capacity factor of 0.25, which means that 2,000 MW of peak solar power would generate roughly the same amount of electricity annually as one 700 MW coal-fired power plant or a single 550 MW nuclear power plant, if there were such a thing. Perhaps this project's biggest benefit is in its scalability. Unlike a new nuke, which would probably take about as long to build, the Chinese won't need to wait until the project was completed in 2019 to get useful electricity from it. Each sub-project would stand on its own, and the first one could start generating within a year or two.
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On balance, then, this huge solar project could produce as much peak power as a pair of nuclear power plants (or large coal-fired plants)--though still quite a bit less than either of those technologies over the course of a year--while costing about as much as one large nuclear reactor, even allowing for significant cost improvement between the time the first and last solar panels are installed. How useful such a facility will be is largely a function of whether that region of China has a greater need for lots of power when the sun happens to shine, or reliable power around the clock. I'm as pleased as anyone that China appears to be diversifying its energy mix away from coal, even to a modest degree, and there's certainly nothing about building such a facility that precludes expanding nuclear power, since in the long run the country is likely to need lots more of both. Still, in terms of bang for the buck and without factoring in what this one project might do to help bring down the cost of solar power elsewhere, it hardly seems an obvious choice.
Tuesday, September 08, 2009
Cap & Trade, Gas Prices and Uncertainty
Over the weekend a New York Times editorial critical of the energy industry for trying to stir up opposition to the Waxman-Markey climate bill prompted some further thought on the potential impact of the legislation on gasoline prices. The Times appears to accept the government's analysis suggesting that the increase would amount to no more than 20 cents per gallon by 2020, though this conventional wisdom collides with common sense, since such a low price on carbon seems unlikely to stimulate sufficient conservation and investments in efficiency to deliver on a steadily-shrinking national emissions cap. In particular, the Times seems unfazed by the way the bill's allocation of free emission allowances is stacked against the oil industry, suggesting that it, of all industries, can surely afford the extra burden. Yet it's precisely that distortion that I believe could throw all of the official estimates of future permit prices--and thus gas prices--into a cocked hat, when you consider the possible dynamics of a market established along these lines.
Let's start by stating the obvious: I don't have a detailed computer model of the energy markets and US economy to query on the likely outcome from the cap & trade system that would be instituted under Waxman-Markey, though I could probably come up with some drastically-undervalued credit default swaps for anyone who believes in the infallibility of such models. My assessment relies instead on logic and the experience of a career that included a long stint in energy commodity trading, including futures, options and derivatives. Based on that experience, I believe the crucial starting point for any attempt to understand how a new market might function is supply and demand: who has the commodity in question and who needs it.
Begin with demand. The Department of Energy's recent "flash estimate" of US CO2 emissions indicates that the electricity sector accounts for 41% of emissions, followed by transportation with 33%, and the non-electricity-related emissions of the industrial sector a distant third at around 17%. These three segments thus account for 91% of our CO2 emissions, by far the largest component of our greenhouse gas output. Under cap & trade, every ton of those emissions would have to be matched with a corresponding emission allowance, or the emitter would be liable for penalties at a multiple of the going price for allowances. Anyone who is given fewer allowances than their current emissions must thus either reduce their emissions directly or purchase allowances from others. But who are the likely sellers? A careful reading of the bill provides strong hints
Under President Obama's original concept of cap & trade, in which 100% of emission allowances would have been auctioned by the government to the emitters that needed them, all sectors of the economy would have been in the same position of needing to cover their entire shortfall in the market. The government would have been the primary seller, though as the market evolved, companies that found cheap ways to reduce their own emissions would have ended up reselling allowances they had bought earlier, at a profit. Under Waxman-Markey, by my tally roughly 60% of the emission allowances would be handed out to emitters such as utilities, refiners and other industrial firms. Another 30% or so would be doled out in lieu of cash to fund efforts such as renewable energy R&D and deployment, climate adaptation and assistance to low-income consumers. Something less than 10% would be auctioned by the government itself to fund deficit reduction and other initiatives.
So on a given day, who would be selling and who would be buying? Consider the utilities and merchant power generators. As generous as the bill's authors were to this sector, it would still be short allowances from day 1, with a gap between actual emissions and free allowances equal to roughly 4% of US emissions. Non-energy industrial firms probably wouldn't be selling, either, at least unless the price got high enough to stimulate the big investments in energy efficiency that haven't risen to the top of their capital budget priorities so far. Initially, they would need to acquire allowances equal to around 5% of all emissions. And that brings us to refiners, who under Waxman-Markey would be responsible for their own emissions plus all of the emissions from the end-use of their products by non-regulated consumers, yet would receive only a 2% allocation of free allowances. Depending on how upstream production and oil imports are counted, the gap that refiners would need to cover could amount to more than 31% of all US emissions, or 3/4ths of the allowances given to non-emitting entities or auctioned directly by the government. At the same time, they have only modest scope for further reductions in their own emissions, considering that they are already 90% energy-efficient, on average. Who would be likely to have the advantage in such a situation? It sure looks like a "sellers' market" to me.
I don't doubt that refiners could probably scoop up some relatively cheap allowances from groups that get handed these tickets and don't quite know what to do with them, though market sophistication--and for-fee advice on such matters--might spread quickly. But refiners wouldn't just need to sweep up the stragglers, here. They'd require the entire allowance streams of many of the legislation's chosen beneficiaries for years to come, nor could they risk coming up massively short in any year. To me that suggests an average acquisition price for allowances that could rise well above the notional $15-$20/ton expounded by the EPA and DOE, considering that the effective price ceiling provided by brute-force CO2 reductions such as carbon capture and sequestration is probably north of $50/ton, equating to 50 cents per gallon of gasoline. While an increase that high might not be the likeliest outcome, it is at least plausible, and it would be added not to current gas prices, which have been depressed by the recession, but to those that would prevail after the legislation went into effect, when the economy--and perhaps even fuel demand--was presumably growing again. It doesn't take a leap of imagination to combine these factors to get to the $4 per gallon that the Times appears to dismiss.
From the last sentence of the editorial, I have to conclude that the Times doesn't understand the rationale for cap & trade nearly as well as they think they do. The point of this approach and any well-structured legislation implementing it is not to wean the US off of petroleum, but to reduce our emissions of the greenhouse gases implicated in climate change. While that certainly implies lower emissions from the oil sector, and thus lower consumption, it is perverse and counter-productive to shelter higher-emitting sectors that have greater flexibility for reducing emissions. The Congress may have judged that consumers would complain more about higher electricity bills than about increases at the gas pump, which could always be blamed on other factors--and on a singularly unpopular industry. But in creating such a wide disparity of demand for allowances among business sectors, they risk driving the price of those allowances much higher than otherwise, imposing an unnecessary drag on the economy. Even if their protests are motivated by self-interest, the oil industry and oil consumers are right to point this out.
Let's start by stating the obvious: I don't have a detailed computer model of the energy markets and US economy to query on the likely outcome from the cap & trade system that would be instituted under Waxman-Markey, though I could probably come up with some drastically-undervalued credit default swaps for anyone who believes in the infallibility of such models. My assessment relies instead on logic and the experience of a career that included a long stint in energy commodity trading, including futures, options and derivatives. Based on that experience, I believe the crucial starting point for any attempt to understand how a new market might function is supply and demand: who has the commodity in question and who needs it.
Begin with demand. The Department of Energy's recent "flash estimate" of US CO2 emissions indicates that the electricity sector accounts for 41% of emissions, followed by transportation with 33%, and the non-electricity-related emissions of the industrial sector a distant third at around 17%. These three segments thus account for 91% of our CO2 emissions, by far the largest component of our greenhouse gas output. Under cap & trade, every ton of those emissions would have to be matched with a corresponding emission allowance, or the emitter would be liable for penalties at a multiple of the going price for allowances. Anyone who is given fewer allowances than their current emissions must thus either reduce their emissions directly or purchase allowances from others. But who are the likely sellers? A careful reading of the bill provides strong hints
Under President Obama's original concept of cap & trade, in which 100% of emission allowances would have been auctioned by the government to the emitters that needed them, all sectors of the economy would have been in the same position of needing to cover their entire shortfall in the market. The government would have been the primary seller, though as the market evolved, companies that found cheap ways to reduce their own emissions would have ended up reselling allowances they had bought earlier, at a profit. Under Waxman-Markey, by my tally roughly 60% of the emission allowances would be handed out to emitters such as utilities, refiners and other industrial firms. Another 30% or so would be doled out in lieu of cash to fund efforts such as renewable energy R&D and deployment, climate adaptation and assistance to low-income consumers. Something less than 10% would be auctioned by the government itself to fund deficit reduction and other initiatives.
So on a given day, who would be selling and who would be buying? Consider the utilities and merchant power generators. As generous as the bill's authors were to this sector, it would still be short allowances from day 1, with a gap between actual emissions and free allowances equal to roughly 4% of US emissions. Non-energy industrial firms probably wouldn't be selling, either, at least unless the price got high enough to stimulate the big investments in energy efficiency that haven't risen to the top of their capital budget priorities so far. Initially, they would need to acquire allowances equal to around 5% of all emissions. And that brings us to refiners, who under Waxman-Markey would be responsible for their own emissions plus all of the emissions from the end-use of their products by non-regulated consumers, yet would receive only a 2% allocation of free allowances. Depending on how upstream production and oil imports are counted, the gap that refiners would need to cover could amount to more than 31% of all US emissions, or 3/4ths of the allowances given to non-emitting entities or auctioned directly by the government. At the same time, they have only modest scope for further reductions in their own emissions, considering that they are already 90% energy-efficient, on average. Who would be likely to have the advantage in such a situation? It sure looks like a "sellers' market" to me.
I don't doubt that refiners could probably scoop up some relatively cheap allowances from groups that get handed these tickets and don't quite know what to do with them, though market sophistication--and for-fee advice on such matters--might spread quickly. But refiners wouldn't just need to sweep up the stragglers, here. They'd require the entire allowance streams of many of the legislation's chosen beneficiaries for years to come, nor could they risk coming up massively short in any year. To me that suggests an average acquisition price for allowances that could rise well above the notional $15-$20/ton expounded by the EPA and DOE, considering that the effective price ceiling provided by brute-force CO2 reductions such as carbon capture and sequestration is probably north of $50/ton, equating to 50 cents per gallon of gasoline. While an increase that high might not be the likeliest outcome, it is at least plausible, and it would be added not to current gas prices, which have been depressed by the recession, but to those that would prevail after the legislation went into effect, when the economy--and perhaps even fuel demand--was presumably growing again. It doesn't take a leap of imagination to combine these factors to get to the $4 per gallon that the Times appears to dismiss.
From the last sentence of the editorial, I have to conclude that the Times doesn't understand the rationale for cap & trade nearly as well as they think they do. The point of this approach and any well-structured legislation implementing it is not to wean the US off of petroleum, but to reduce our emissions of the greenhouse gases implicated in climate change. While that certainly implies lower emissions from the oil sector, and thus lower consumption, it is perverse and counter-productive to shelter higher-emitting sectors that have greater flexibility for reducing emissions. The Congress may have judged that consumers would complain more about higher electricity bills than about increases at the gas pump, which could always be blamed on other factors--and on a singularly unpopular industry. But in creating such a wide disparity of demand for allowances among business sectors, they risk driving the price of those allowances much higher than otherwise, imposing an unnecessary drag on the economy. Even if their protests are motivated by self-interest, the oil industry and oil consumers are right to point this out.
Friday, September 04, 2009
What Does Tiber Tell Us?
Like many bloggers this week, I've been thinking about the implications of BP's big, new oil find in the Gulf of Mexico. Some analysts suggest that the Tiber field might contain as much as 3-4 billion barrels of oil, though much of it might never be recovered. The Wall St. Journal's Environmental Capital blog suggests that such discoveries serve as a kind of Rorschach test, with the various interpretations of it telling us more about the observer than the thing being observed. Fair enough. Without venturing into grandiose conclusions about whether the Tiber-1 deep water well refutes--or in some convoluted fashion confirms--the central hypothesis of the Peak Oil theory, this discovery provides a handy opportunity to remind my readers of a few principles and themes about oil exploration and production that I've been discussing here for the last six years:
- There's still life in the old dog. While the US has been drilled like a pincushion for 150 years, we have still not found every barrel of oil that nature provided us. Don't be misled by proved reserves data that seem to show that we have less than 12 years of oil left at current production rates. In point of fact, the US has produced a cumulative 200 billion barrels of oil from reserves that never exceeded 40 billion barrels. Not only do we continue to find new resources in the manner of Tiber-1, but we continually learn how to extract more oil from the reservoirs we've already found, revising their reserves steadily upward over time.
- A discovery like Tiber doesn't mean we've merely added two weeks worth of production to reserves. US oil production, like global production, is comprised of the contributions from thousands of oil fields and hundreds of thousands of oil wells, with the most productive 20% or so accounting for roughly 87% of output. If initial guesses of recoverable oil are right, then the Tiber field could yield on the order of 100,000 bbl/day of oil for 20 years--2% of US production for a generation. If we turn up our noses at that, then we surely ought to think twice about wind power. In 2008 all the wind turbines in the US generated 52 billion kilowatt-hours, backing out natural gas power generation equivalent to just 245,000 bbl/day of oil, or 5% of US oil output.
- We've heard a lot from skeptics about how inconsequential the oil in areas that have been off limits to drilling would be, whether we're talking about offshore California, the eastern Gulf of Mexico, or the Arctic National Wildlife Refuge. Yet without actually exploring these areas using the kind of technology that found the Lower Tertiary trend of which Tiber appears to be a part, in a place that just a few years ago would have seemed both inaccessible and highly improbable, we can't know what's really there, waiting to be discovered. In that light, the official estimate of 18 billion barrels of "undiscovered, technically recoverable" oil in these areas must be regarded as an extremely conservative lower bound, based on totally obsolete 1970s technology.
- Although finding more oil may look problematic from a greenhouse gas perspective, oil is not our worst fuel, and it remains the hardest to displace, because of its unique combination of energy density and portability. I share the vision of many for a future made up of electrified cars and low- or no-emission power plants, but we're going to burn many billions of barrels of oil getting there. For reasons including national security, national pride, and our balance of trade, it matters whose oil it will be, as we make the long transition to a more sustainable energy economy. If we ignore that principle, we're likely to end up even more reliant on unstable foreign suppliers, before we arrive at the elusive promised land of energy independence.
Wednesday, September 02, 2009
Can Solar Compete?
I'm still catching up on articles I missed during my recent vacation. A pair of them from MIT's Technology Review caught my attention, because they seemed to contradict each other. In this month's briefing on low-carbon electricity technologies, TR concluded that while the cost of solar power has declined significantly, it remains too expensive to compete with electricity from fossil fuels. What's needed, they indicate, is better technology. And yet in another article earlier in August TR reported that industry experts at a recent symposium argued that current solar technology had already achieved the necessary cost reductions to compete with conventional energy, and would become more competitive as it scales up. If even MIT's signature technology journal can't agree who's right on this point, how in the world should policy makers decide whether the priority for solar should be further R&D or deployment of the technology we've already got?
There's little debate that solar power is one of the most promising energy options available to us, at least for eventually replacing much of the electricity we currently generate from fossil fuels. The basic science has been well-understood for a long time, either in terms of photovoltaic cells that produce power directly, or the use of concentrated solar radiation to generate steam for power. Unlike energy technologies such as biofuels from cellulose or algae, we don't have to wonder whether we can ever harness solar at a useful scale. Notwithstanding the serious challenges of transmission, distribution and storage, we know that if we covered a modest fraction of the surface area of the US with solar panels or concentrators, they could generate as much electricity as we currently consume, in contrast to the 2/100ths of a percent that it contributed last year. So while there's still plenty of room to improve the technology for turning sunlight into electricity, the main obstacle we encounter is cost. If solar isn't quite cheap enough today, could merely scaling up the existing technologies make it truly cost-competitive with power from coal and natural gas?
Answering that question is complicated by the way we typically compare different power generating technologies on the basis of their "capacity" costs--what it costs to manufacture and install or construct them. For many years the solar industry has pursued a goal based on reducing the manufacturing cost of a solar module below $1 per peak Watt, which would roughly match the installed cost of a gas turbine power plant and come in around half the cost of a coal-fired power plant. Last year a company called First Solar announced that it had reached that milestone. Unfortunately, however, module costs are only half the story. A solar installation requires more than the bare solar module, which converts sunlight into DC power. In fact, a recent study by the Lawrence Berkeley National Laboratory showed that in the last decade non-module costs had declined from around $6 per Watt to just under $4. So even if we extrapolate that trend to $3/W, the installed cost of the industry-leading solar technology would still be around $4/W, and many of the utility-scale solar projects I've been reading about come in around $5-6/W, a level that is far higher than the cost of a natural gas turbine.
Of course gas turbines have a big hidden cost, too, in the form of a perpetual fuel requirement. If you do the math, though, even with fuel cost included a gas turbine runs around half the cost of currently-deployed utility-scale solar power. In order to calculate this, you must make an assumption about how many hours per day the turbine will operate. For the purposes of an apples-to-apples comparison, I chose six hours, which is roughly the number of peak-sun-hours that a solar array would get in a prime location in the Southwest. At a conservative heat rate of 10,000 BTU/kWh, the comparable fuel consumption for each Watt over 20 years would be around 440,000 BTUs. That sounds like a lot, but at recent natural gas prices it would cost around $2. Add another buck for the capacity cost, and we're under $3/W on an undiscounted basis. (Assume that future gas prices inflate at the discount rate, and the NPV would match this figure.) Even adding a $20/ton charge for CO2 emissions would only bring that up by about $0.50/W, based on average emissions for gas-fired power plants. That ignores maintenance and other costs, but then I've ignored solar array maintenance and the gradual deterioration of solar cell output, as well.
In this simple comparison, at least, it appears that today's best solar technology is still somewhat more expensive than the fossil-based power it's likely to be displacing in a typical power grid, while most of the solar arrays now being installed reflect costs at least 40% higher than gas turbines, even after accounting for fuel and CO2 emissions. I'm skeptical that simple economies of scale beyond those already achieved could deliver that kind of improvement any time soon. That might explain the necessity for a 30% federal tax credit or grant on solar installations, along with generous state-level incentives and renewable portfolio standards--mandates on utilities for a targeted level of renewable power. Absent these, much of today's solar activity would probably grind to a halt.
In this light, answering the question we started with requires defining the basis on which we expect solar power to compete in the future. If we're satisfied with needing to apply a combination of incentives and utility mandates more or less indefinitely, in order to achieve the desired level of solar power deployment, then the current technology and its incremental evolution might be perfectly adequate to the task. If, on the other hand, we'd prefer to see solar and other renewables weaned off these subsidies and able to compete on a truly level playing field with conventional energy sources--after adjusting for emissions at market prices--then it looks like a lot more R&D is called for.
There's little debate that solar power is one of the most promising energy options available to us, at least for eventually replacing much of the electricity we currently generate from fossil fuels. The basic science has been well-understood for a long time, either in terms of photovoltaic cells that produce power directly, or the use of concentrated solar radiation to generate steam for power. Unlike energy technologies such as biofuels from cellulose or algae, we don't have to wonder whether we can ever harness solar at a useful scale. Notwithstanding the serious challenges of transmission, distribution and storage, we know that if we covered a modest fraction of the surface area of the US with solar panels or concentrators, they could generate as much electricity as we currently consume, in contrast to the 2/100ths of a percent that it contributed last year. So while there's still plenty of room to improve the technology for turning sunlight into electricity, the main obstacle we encounter is cost. If solar isn't quite cheap enough today, could merely scaling up the existing technologies make it truly cost-competitive with power from coal and natural gas?
Answering that question is complicated by the way we typically compare different power generating technologies on the basis of their "capacity" costs--what it costs to manufacture and install or construct them. For many years the solar industry has pursued a goal based on reducing the manufacturing cost of a solar module below $1 per peak Watt, which would roughly match the installed cost of a gas turbine power plant and come in around half the cost of a coal-fired power plant. Last year a company called First Solar announced that it had reached that milestone. Unfortunately, however, module costs are only half the story. A solar installation requires more than the bare solar module, which converts sunlight into DC power. In fact, a recent study by the Lawrence Berkeley National Laboratory showed that in the last decade non-module costs had declined from around $6 per Watt to just under $4. So even if we extrapolate that trend to $3/W, the installed cost of the industry-leading solar technology would still be around $4/W, and many of the utility-scale solar projects I've been reading about come in around $5-6/W, a level that is far higher than the cost of a natural gas turbine.
Of course gas turbines have a big hidden cost, too, in the form of a perpetual fuel requirement. If you do the math, though, even with fuel cost included a gas turbine runs around half the cost of currently-deployed utility-scale solar power. In order to calculate this, you must make an assumption about how many hours per day the turbine will operate. For the purposes of an apples-to-apples comparison, I chose six hours, which is roughly the number of peak-sun-hours that a solar array would get in a prime location in the Southwest. At a conservative heat rate of 10,000 BTU/kWh, the comparable fuel consumption for each Watt over 20 years would be around 440,000 BTUs. That sounds like a lot, but at recent natural gas prices it would cost around $2. Add another buck for the capacity cost, and we're under $3/W on an undiscounted basis. (Assume that future gas prices inflate at the discount rate, and the NPV would match this figure.) Even adding a $20/ton charge for CO2 emissions would only bring that up by about $0.50/W, based on average emissions for gas-fired power plants. That ignores maintenance and other costs, but then I've ignored solar array maintenance and the gradual deterioration of solar cell output, as well.
In this simple comparison, at least, it appears that today's best solar technology is still somewhat more expensive than the fossil-based power it's likely to be displacing in a typical power grid, while most of the solar arrays now being installed reflect costs at least 40% higher than gas turbines, even after accounting for fuel and CO2 emissions. I'm skeptical that simple economies of scale beyond those already achieved could deliver that kind of improvement any time soon. That might explain the necessity for a 30% federal tax credit or grant on solar installations, along with generous state-level incentives and renewable portfolio standards--mandates on utilities for a targeted level of renewable power. Absent these, much of today's solar activity would probably grind to a halt.
In this light, answering the question we started with requires defining the basis on which we expect solar power to compete in the future. If we're satisfied with needing to apply a combination of incentives and utility mandates more or less indefinitely, in order to achieve the desired level of solar power deployment, then the current technology and its incremental evolution might be perfectly adequate to the task. If, on the other hand, we'd prefer to see solar and other renewables weaned off these subsidies and able to compete on a truly level playing field with conventional energy sources--after adjusting for emissions at market prices--then it looks like a lot more R&D is called for.